AMAT Outperforms in Each Category

“Let’s get to the AMAT news because you see the stock reacting in rather nicely, up 3% on this news. Applied Materials just absolutely blowing through all forecasts here. The company reporting 13 cents a share against the 3 cents that Wall Street was anticipating on much better than expected revenue as well. $1.53 billion against the $1.317 or $1.32 billion consensus. Look at the new orders as well, $1.47 billion. The expectations were about $1.24 billion. If you were looking for cap-ex improvements by some of the major chip makers out there…”– CNBC’s Closing Bell 11/11/2009

Most analysts were not very optimistic coming into the fourth quarter earnings release from Applied Materials (AMAT) because of expected weakness in the semiconductor industry over the coming months. Prior to the release, Bloomberg.com posted an article that referred to analysts’ belief that AMAT would need to cut their workforce by 1500 jobs in order to size the company to the slower growth ahead. The implication being, the largest manufacturer of equipment used to produce semiconductors would be hobbled by the slowdown in cap-ex spending in the industry. The article quotes the trade group Semiconductor Equipment and Materials International’s estimate that the market for semiconductor manufacturing equipment would shrink to $15 billion this year, half the level of 2008 and just over a third of the 2007 market size. Surely, AMAT is thankful that this horrendous year for the industry is nearly finished.

The numerous calls for headcount reduction were correct and the company announced that they would shed between 1300 and 1500 jobs over the next year. The reduction of up to 12% of their workforce will take place over the next year and a half. This will appreciably lower the costs structure for the company that is dealing with a difficult operating environment. Applied Materials said that the job cuts will realize cost savings of $450 million annually.

Other than the obvious need to downsize, the rest of the results were quite good. Earnings and revenues both handily exceeded even the most bullish of estimates and the firm’s own guidance. Comparisons to a year ago still show declines but sequentially there is marked improvement. AMAT’s sales and orders improved across each business segment, which include semiconductor manufacturing hardware, services, LCD display hardware, and energy and environmental solutions. Energy and environmental solutions is largely comprised of their solar energy division, which has to this point been a drag on performance. However, management believes this division will “achieve breakeven or better results in 2010.” In less than three years time, AMAT has grown that division to over $1 billion in annual net sales. Lastly, the company anticipates sales to grow will by 30% in the year ahead will leads us to believe the worst is behind Applied Materials.

Our stance on AMAT coming into the week was Overvalued based on the slacking earnings and sales. For example, over the last year revenue has decreased 38% leading the company to lose of $305 million. Meanwhile, the stock has risen 24% over the last twelve months. The better than expected results in combination with the lower cost structure may make us soften our stance in future reports, but for now we are maintaining the Overvalued rating.

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